Are Your Calls Qualified Covered Calls?
Qualified covered calls (or QCCs) are useful to taxpayers in many
investment situations. However, the rules defining a
"qualified covered call option" are complex, and
investors often have difficulty determining which calls meet the
A call constitutes a qualified covered call only if it meets at
least three basic conditions.
First, the call's strike price must not be too deep in-the-money,
which means that the strike price must be close to the closing
price for the stock on the previous day. The minimum strike
price required for QCC status is usually one strike below the
stock's previous day's closing price. In addition, the
strike price must be at least 85% of the closing price.
Second, options on the underlying stock must be listed on an
options exchange. The call in question does not need to be
listed, but some option on the underlying stock must be listed.
Third, when the investor enters into the call, it must have more
than 30 days remaining to expiration but not more than 33 months.
26, 2002, Treasury issued final
regulations defining QCCs.
The regulations impose additional strike price rules on
calls with terms over twelve months. They maintain the
old rule requiring a minimum strike price relative to the
stock's close, but they also mandate that before applying
this rule, the investor must first increase the stock's
closing price by a non-compounded two percent per
quarter. So if a stock closed at $40.00 and a call
had a twenty-five month term, the investor would first
multiply $40.00 by 1.16 (1 + (2% x 8 quarters)), reaching a
product of $46.40. With this "applicable stock
price," the minimum strike price required for the call
would be $45.00 (rather than $40.00, the pre-regulations minimum
Under the American
Jobs Creation Act of 2004, writing in-the-money calls
suspends the holding period required to capture dividends or
the DRD. See Tougher
Rules For Hedging Dividends.
To help investors
determine whether their calls are qualified, Twenty-First
Securities has created an interactive call
assessment program for options acquired on or after July
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involve risk and are not suitable for all investors. Before engaging in an options transaction,
investors must review the booklet "Characteristics
and Risks of Standardized Options".